Stocks with Sound Incentives

There are stock quoted companies that are not really suitable for the stock markets. This is the case if the incentives for the managers badly match those of the owners. For example, a life insurance company management has the difficult task to decide whether to pass investment profits on to customers or to their owners. Here, a cooperative would be the better form of incorporation than a stock quoted company.

Incentives are also conflicted in businesses that are run by partners such as investment banks, private equity firms and consulting and investment companies with high variable executive compensation. In these cases, the partners must decide how much money to keep for themselves and how much to distribute to the owners. Owners' and executive' interests are opposite.

Finally, there are entire industries with problematic incentives because competition does not work well. This is the case in the airline industry with frequent excess capacity, bankruptcies, and unfair new low-cost beginnings.

There are studies in the United States and Switerzland that show that the returns of stocks with unhealthy incentives are inferior to those where incentives are sound. All shares with unhealthy incentives are excluded from the Obermatt stock focus Sound Incentives.